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What is CRR (Cash Reserve Ratio)? How does CRR regulate money supply?

What is CRR (Cash Reserve Ratio)?

crr

CRR (Cash Reserve Ratio) is a ratio of total bank deposits or a portion of the banks’ NDTL (Net Demand and Time Liabilities) that the banks are required to maintain with the Central Bank of the country (in India, RBI is the central bank). In other words, we can say under CRR, the banks are required to keep and maintain a certain percentage of the total bank deposits in the current account maintained with RBI (Reserve Bank of India). RBI uses CRR as an instrument either to increase the money supply or to drain out the excessive money from the system.

How does CRR regulate money supply?

CRR is maintained on fortnightly basis and the banks earn no interest as it is kept in current account held with the Reserve Bank of India. If RBI fixes CRR level at 4%, indicates that the banks keeps Rs.4 in their current account maintained with RBI for every Rs.100 of their deposits and consequently, the banks can use only Rs.96 for their economic or commercial activities like lending money to corporate or borrowers.

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What is CRR (Cash Reserve Ratio)? How does CRR regulate money supply?
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